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Bringing Defi to Institutions: Insights from Jeremy Allaire

Bringing Defi to Institutions: Insights from Jeremy Allaire

Alex Behrens Alex Behrens July 7, 2021

Circle Co-founder and CEO Jeremy Allaire recently sat down with Nathaniel Wittemore of Coindesk to discuss the future of bringing DeFi to institutions. Check out the highlights from this far ranging discussion of the value of DeFi and crucial work on infrastructure and regulations still to come.

Getting started with DeFi

With an economic backdrop of near-zero interest rates and high inflation, businesses the world over are searching for ways to put capital to work. DeFi is one place they’re looking, but active engagement with decentralized finance protocols has so far been timid.

“Right now, the interest from businesses and institutions is fairly broad and fairly nascent. There have been some high-profile companies that have put Bitcoin on their balance sheets, but it’s pretty limited,” Allaire said.

“There are more and more asset management firms that have some kind of strategy around this, but it’s just getting started. And when we talk about DeFi specifically, institutional involvement is extremely limited right now; actively allocating into ‘yield farming’ or long-tail crypto tokens, there aren’t a lot of institutions doing that.”

 

Despite recent headlines over businesses like Tesla or MassMutual buying native crypto tokens as a part of their treasury strategy, such aggressive moves are a bridge too far for most corporations today. However, yields generated through dollar digital currency capital markets offer a more palatable alternative.

“Certainly on the corporate side of things, I think if I’m a corporate treasurer and I’m looking at this today, I’m curious about DeFi, I’m hearing a lot about it, but I’m extremely intimidated - it feels dangerous and risky, and kind of nuts. It’s like science fiction. However, one of the things that we’ve been seeing is that from many corporate treasurers, they’re having a hard time wrapping their head around allocating into something like Bitcoin, but they’re seeing yield markets that have emerged with dollar-denominated and dollar-delivered stablecoin yield that is very attractive,” Allaire said.

“That actually feels more comfortable to an institution in many ways than taking principal risk directly in a cryptocurrency. In terms of inbound institutional interest for this, we’re seeing for the first time people who are CFOs or treasurers of regular corporations coming and saying ‘I’m interested in looking at these stablecoin denominated yields.’”

What Does DeFi Have To Offer?

DeFi is one of the world’s youngest industries, already offering increased financial access to underbanked people and innovative financial instruments to advanced traders. So what does the future hold for this engine of innovation?

“Our thesis is that, over time as DeFi infrastructure matures, it can be a very efficient form of capital market that every business can tap into, in the same way they do today indirectly through banks and commercial banks that intermediate capital markets on their behalf,” Allaire said. 

“More and more it will be about businesses, perhaps working through financial technology firms, that are intermediating DeFi on their behalf, but where they’re more direct participants in the capital markets themselves. That’s ultimately the promise of DeFi - that market participants can face each other in a more efficient, direct way, without the traditional rent-seeking.”

 

Eliminating the middleman is a welcome change, but how does it fit into the bigger picture?

“In the early days of the internet, if you wanted to reach a global audience you had to spend millions of dollars on big broadcast channels. Then long-tail advertising markets emerged where almost anyone could reach anyone with a directed advertisement with incredible cost efficiency, and that was transformative for commerce,” Allaire explained. 

“That’s the kind of change we think is possible in capital markets, which should mean that businesses and households can more efficiently deliver capital and borrow capital, do that more directly with fewer intermediaries, lower cost, and better risk management that ultimately delivers growth into the economy.”

 

DeFi has the potential to unlock a new dimension of capital access and business opportunities for institutions around the world, but the infrastructure required will rival some of the greatest technical achievements in human history.

“What is it going to take to have an infrastructure that can do a million transactions per second,” Allaire posed, “that can do web scale compute, information transmission, and transaction throughput? If we really want this to be something that a billion people are using, or two billion people are using, we have to get there.”

A $350 Trillion Market

DeFi has seen unprecedented growth over the past year, now locking more than $50 billion in assets for protocol use. But to truly bring DeFi to institutions, serious conversations will need to be had about the regulatory treatment of these new financial tools.

“I think what institutions are really looking for are scale, capital efficiency, and usability, as well as the ability to interact with this infrastructure in a trusted way and in a legally compliant way. A lot of people in DeFi don’t want to hear about the legally compliant issues, but if you want this to be used by everyday every-way businesses around the world, you have to figure out a way to connect real world entities to face each other in these markets,” Allaire said.

“It’s absolutely critical that regulators be brought up to speed. The scale of DeFi today is such that major national governments are reacting in different ways, so you have to go and educate. This technology and these market structures are so far ahead of where regulators are that it becomes its own risk, because if something truly bad happens it can cause an overreaction.”

“I think the concept of a capital market existing on the public internet as autonomous software that runs in the public domain, that hurts a regulator's head. But if you spend time with regulators and show them this is a world where the efficiency, transparency, and risk management of this open blockchain system is going to improve the financial system, provide greater access around the world, and actually provide greater transparency, greater auditability, greater understanding of risks, and that’s going to improve the broader economy, people say ‘Oh, that sounds good!’”

“It comes down to we need to know that people who are interacting through this are not breaking the law,” Allaire continued. 

“Simultaneously one of the biggest challenges and opportunities is creating a way for individuals and institutions to verify themselves and know that they’re interacting with other verified entities, it will make DeFi safer and something that a radically larger number of institutions will want to participate in. That’s how you get to something that eats into the $350 trillion dollar global equity and debt markets.”

 

DeFi is just getting started, and the progress already made has laid the groundwork for even greater progress in the coming years. 

“We’ve seen fundamental infrastructure improvements, protocol improvements, governance improvements, I feel like there's been relentless improvement going on. And now that the treasuries on these projects are quite robust, and the huge number of firms around this that are very well capitalized, the build out from here is super exciting.”

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